Bank Funding Replaced With Leasing For IT Equipment

IT investments vital to maintain UK’s competitive edge

UK business are increasingly replacing bank loans with asset finance as their preferred way to fund investment in IT equipment.

Asset finance used by businesses to acquire IT and software jumped 26% to £1.344bn in the last 12 months, up from £1.069bn* last year.

The rapid growth in asset finance, including leasing, to fund IT investment is far outpacing the overall growth in asset finance which grew by 3% over the same period.

Asset finance is seen as an increasingly important source of funding since, for many businesses, as traditional lending has reduced significantly. Since the recession banks have been under pressure to rebuild their balance sheets to meet strict capital asset ratio requirements. More recently, some have had to absorb the cost of PPI misselling claims.

Overall lending by banks to UK businesses is continuing to fall – down by 2.8%** in the last 12 months.

Chief Executive until its acquisition by Wesleyan Bank in 2015, Philip White commented: “Businesses have under-invested in IT equipment because of uncertainty in the economy and because bank funding for IT investment has been so hard to secure. Some banks have also been unwilling to lend money for IT solutions because they no longer have the specialist skills required to understand the risk and long-term value involved in lending against IT assets.”

“This lack of available bank liquidity for IT investment is even more worrying than the overall lack of business finance as IT investment is so vital in keeping UK businesses competitive on a global basis.”

“For businesses of all sizes IT investment is critical in driving efficiency, scaleability and growth. Many of the UK’s vitally important small to medium sized businesses are having to cope with IT infrastructure that is years older than it was originally intended to be.”

“Any signs that businesses are getting fresh finance to invest in hard IT hardware and software are very welcome.”

Despite the increase in leasing to fund IT equipment, it is concerning that even this good news may be dwarfed by the fall off in traditional bank lending for this kind of investment.

However, Philip White argues that a longer term rebalancing of business funding away from bank loans and towards asset finance could turn out to be positive. Philip explains that some traditional bank lending, such as overdrafts, can be discontinued at almost no notice. Even long-term loans can be withdrawn from businesses if the company’s turnover or profitability falls below a threshold set by the bank as a pre-condition of its lending. Lease finance, however, stays in place just as long as the business is able to make its payments.

Explains Phillip White: “Leasing allows a business to invest in IT without reducing its vital cash facilities and without necessarily adding to the level of debt that a business carries on its balance sheet. Because leasing does not affect a business’ other credit lines, the company concerned has more scope to borrow money when they need it in the future and the opportunity to keep their hard-won cash reserves for a rainy day.”

*Year to Sept 30th 2012, Source: FLA

** Bank of England, lending to private sector non-financial companies

[Articled updated following the acquisition of Syscap Ltd by Wesleyan Bank Ltd. Note Syscap rebranded to Wesleyan Bank in Jan 2018]